Amazon Brings More Apparel Pain to Macy’s et al., Says Morgan Stanley

By Tiernan Ray

Shares of Macy’s (M) are up almost 4% this morning, after Citigroup raised its rating on the shares to Buy from Hold, as my colleague Ben Levisohnthis morning reported.

However, Morgan Stanley’s Brian Nowak has more bad news for retail at the hands of Amazon.com (AMZN), estimating the latter may have increased apparel sales by $1 billion in the June quarter.

With the help of colleague Kimberly Greenberger, Nowak writes that “with key mall anchors accelerating the pace of store closures (i.e. ~100 Macy’s stores), we are increasingly confident department stores will continue to cede market share over time.”

Nowak, who has an Overweight rating on Amazon shares, offers some back-of-the-envelope math on Amazon’s increasing push into retail:

As a follow up to our note earlier this year (N. America Insight: Amazon Fashion – Is 7% Just the Beginning?), we take a look at the apparel gains and losses reported thus far in 2Q. We estimate Amazon’s North America gross merchandise value (GMV) – the true measure of AMZN’s share gains of retail consumer expenditure – accelerated to 34% y/y growth in 2Q (from 33% in 1Q). While we do not know AMZN’s GMV by category, if we assume the mix is roughly equivalent to the Forrester estimated mix of overall U.S. eCommerce and assume 90% of AMZN’s North America GMV is from the U.S., that implies ~$1.1bn of AMZN’s 2Q GMV growth was generated from US apparel sales (~14% of the 2Q growth). Additionally, we estimate the US apparel market likely grew ~$825-850M during the quarter assuming 1.3% growth (the average rate over the past 10 years). Department stores lost ~$660M in total revenue (M, KSS, DDS, JCP, JWN, SHLD) and an estimated $225M in apparel sales in 2Q16 (Exhibit1). Assuming AMZN captured all of the 2Q apparel market growth and all of the lost department store apparel sales implies AMZN apparel sales would have grown ~$1.1B from these two sources alone. While it is unlikely that all of AMZN’s $1.1B 2Q apparel growth came from the department stores alone, the magnitude of the dollar growth of AMZN’s apparel business suggests they are a source of at least some of AMZN’s share gains.

That all adds up to a loss of $225 million for department stores in the quarter in apparel sales, Nowak and Greenberger estimate. For all of the first half of the year, they probably lost $625 million, they estimate.

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.